A rural sentiment dependant on monsoons, the extent of how leveraged households are and a surge of unsecured loans are on the radar of Non Banking Finance Companies (NBFC) like Shiram Finance and Mahindra Finance.
Speaking at the BQ Banking Unlimited Summit in Mumbai, Umesh Revankar, Executive Vice Chairman, Shriram Finance and Raul Rebello MD and CEO designate of Mahindra Finance spelt out the NBFC advantage in the banking space and how they plan to make the best use of the current growth cycle.
Answering a question on their market presence amid traditional banks, Revankar singled out the potential for growth in NBFCs is faster as they eliminate the bank to customer distance even further.
“NBFC's advantage is that they go to the customer…We create an opportunity to go to the customer that's why we are growing faster. But we are not a competition to traditional banks, we are merely creating more comfort to the customer,” he said.
Rebello also explained how NBFCs are redefining the playbook. Both companies who are primarily specialise in the auto and vehicle space noted how NBFCs have penetrated the market better with their approach, giving them a leg up in accquiring more customers in the same market.
Meaningful Diversification
Mahindra's Rebello noted how meaning diversification emerged as a must for NBFCs at a time when the pandemic raised questions on the business model and the traditional customer base, who were at a higher risk of defaulting.
"Meaningful diversification in the customer segment and asset category is a necessity for NBFCs," he said, adding that in the last two years, Mahindra Finance has started diversifying from their flagship auto lending business.
The two speakers also noted how NBFCs are not asset specific anymore either and many categories like housing, mortgage and SME have been added.
Tech- A Tool And An Enabler
Revankar noted how technology is also changing the banking ability of NBFCs.
"For us technology is a tool and an enabler," he said explaining that technology helps NBFCs underwrite better, understand the income sources of customers better, reach out to them, collect/recover easily and also offer productivity gains while improving the overall asset quality.
Surge Of Unsecured Loans
There is a big bet on the growth of NBFCs in India and recently rating agency ICRA also estimated that the retail credit given out by NBFCs would grow 18-20% for FY24 from an earlier assessment of 12-14%, citing strong traction for unsecured loans as the reason.
Further ICRA noted that the NBFC-retail asset under management (AUM) is estimated at around Rs 14 lakh crore as of March 2023.
While Revankar and Robello's companies deal more in secured loans, they acknowledged an underlying risk of how stressed assets of households that are already leveraged would be a long term concern for NBFCs.
Other challenges for NBFCs include rural sentiment which is dependant on the rainfall coupled with the GDP growth expectation as inflation persists.
"I don't see a challenge for NFBCs unless GDP growth comes below 6%," Revankar noted.
The RBI expecation of GDP growth for FY24 is set at 6.5%
Watch the full discussion below
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